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Fitting and testing for the implied volatility curve using parametric models
Author(s) -
Chang ChuangChang,
Chou PinHuang,
Liao TzuHsiang
Publication year - 2012
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20549
Subject(s) - econometrics , implied volatility , volatility (finance) , volatility smile , extant taxon , parametric statistics , computer science , robustness (evolution) , economics , mathematics , statistics , biochemistry , chemistry , evolutionary biology , gene , biology
Numerous issues have arisen over the past few decades relating to the implied volatility smile in the options market; however, the extant literature reveals that relatively little effort has thus far been placed into comparing the various implied volatility models, essentially as a result of the lack of any theoretical foundation on which to base such comparative analysis. In this study, we use a comprehensive options database and employ methods of combining the various hypothesis tests to compare the different implied volatility models. To the best of our knowledge, this is the first study of its kind to address this issue using combination tests. Our empirical results reveal that the linear piecewise model is the most appropriate model for capturing the implied volatility smile, with additional robustness checks confirming the validity of this finding.